Category: Oil

Price movement recap

During the last 3 weeks, the oil price had first declined due to the lockdown announcements and political election uncertainties. Afterwards the oil price rebounded thanks to the Biden’s election (production in the US is expected to decrease + no more uncertainties on this election). Biden’s diplomacy is also a positive factor compared to Trump’s unpredictability. The optimistic outlook of 90% effective vaccines from Pfizer and 94.5% effective vaccines from Moderna allowe the market to rise, especially in the transport and energy (oil) sectors.

Futures prices / Cost Curves:

The Gulf Oil market is still in contango. Indeed, because of the Covid-19, supply remains higher than demand. However, if the vaccine developed by Pfizer and Biontech proves to be effective, we expect the price curve to flatten slightly in the coming months but still in contango. According to IEA (International Energy Agency), the Covid-19 vaccine is unlikely to raise oil prices until the end of 2021. A weaker demand outlook combined with rising supply is putting pressure on global producers to hold back output in order to support prices.

As explained above, the forecast for demand in the coming years is lower than it was at the beginning of the year. As shown in the chart below, this will necessarily impact the level of prices downward (supply > demand). We have used the Brent forward curve as there is not enough data on Dubai Crude. However, as the correlation between the different types of oil is very high, the scenario will be very similar for Gulf Oil.

Supply and demand dynamic

As we can see on graph 4, oil demand in the Middle East has not changed in the last 3 weeks. However, OPEC expects a decrease in demand for the end of 2020 and in 2021. Therefore, they will change their production plan as of January 2021. These changes are still due to Covid-19 and will last until mid-2021. Finally, we expect an upturn in demand thanks to optimistic forecasts of the Indian and Chinese economies.

Regarding the production, as shown in graph 5, it has slightly increased in September but is still very low compared to the same period in 2019. Finally, between the 30^th November and 1^st December OPEC members will meet the non-OPEC allies to discuss the production policy. The results of this meeting will also have an impact on price levels.

Recommendations

The market is still in contango and, from our point of view, will remain so for a long time. From an investment perspective, we still recommend to be long for the next 3 to 6 months. If the Covid-19 vaccine proves effective, this could have a significant impact on price level in the medium term with as the demand would pick up again, particularly in the field of transport and energy. Furthermore, we believe that the current price does not reflect the potential for recovery in the transport sector otherwise the price would have been higher.

Abbas Al-Azawi

Alexis Baeriswyl

Valery Sikorskiy

References

BOURSE, Zone, [no date]. PÉTROLE BRENT (LONDON BRENT OIL) : Graphique de Cours Comparatif | XBNT | XX00000BRENT | Zone bourse. [online]. [Viewed 28 October 2020]. Available from: https://www.zonebourse.com/cours/matiere-premiere/LONDON-BRENT-OIL-4948/graphiques-comparatif/

Dubai Crude Oil (Platts) Financial Futures Quotes – CME Group, [no date]. [online]. [Viewed 27 October 2020]. Available from: https://www.cmegroup.com/content/cmegroup/en/trading/energy/crude-oil/dubai-crude-oil-calendar-swap-futures.html

Le pétrole récupère au lendemain d’une forte chute, 2020. Allnews [online]. [Viewed 27 October 2020]. Available from: https://www.allnews.ch/content/march%C3%A9s/le-p%C3%A9trole-r%C3%A9cup%C3%A8re-au-lendemain-d%E2%80%99une-forte-chute

London open: Hopes for oil reprieve on reports of China SPR buy-up, [no date]. FXStreet [online]. [Viewed 27 October 2020]. Available from: https://www.fxstreet.com/analysis/london-open-hopes-for-oil-reprieve-on-reports-of-china-spr-buy-up-202004020828

SHEPPARD, David, 2020. Oil traders braced for balancing act in wake of US election. [online]. 27 October 2020. [Viewed 28 October 2020]. Available from: https://www.ft.com/content/00f63355-c1fa-4cf8-ad18-450c12440106

This Week in Petroleum, [no date]. [online]. [Viewed 29 October 2020]. Available from: https://www.eia.gov/petroleum/weekly/

Westbeck Capital Management LPP, 2020. Monthly Newsletter [medium]. London: Westbeck Capital, september 2020.

Organization of the Petroleum Exporting Countries, 2020. OPEC Monthly Oil Market Report [online]. Vienna: OPEC, 11 november 2020. Available from: https://www.opec.org/opec_web/en/publications/338.htm

ASHRAF, Muqsit, 2020. Big Oil must make seismic changes to survive. [online]. 9 November 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/2596d26c-76a6-46e6-9493-b2490b28fb24


ASHWORTH, Louis, 2020. Oil hits $45 and markets climb on vaccine hopes. The Telegraph [online]. 11 November 2020. [Viewed 17 November 2020]. Available from: https://www.telegraph.co.uk/business/2020/11/11/markets-live-latest-coronavirus-news-pound-euro-ftse-100/

Covid vaccine breakthrough fuels broad global equity rally, 2020. [online]. [Viewed 15 November 2020]. Available from: https://www.ft.com/content/48400214-6caf-4d88-b145-75a3cead2b23

L’Opep risque de regretter son “ami” Trump, craint l’ère Biden, [no date]. Investing.com France [online]. [Viewed 13 November 2020]. Available from: https://fr.investing.com/news/commodities-news/lopep-risque-de-regretter-son-ami-trump-craint-lere-biden-1986755

MEREDITH, Sam, 2020. OPEC cuts 2020 oil demand forecast again on rising Covid cases — sees slower recovery next year. CNBC [online]. 11 November 2020. [Viewed 14 November 2020]. Available from: https://www.cnbc.com/2020/11/11/oil-opec-cuts-2020-demand-forecast-again-on-rising-covid-cases.html

MILLER, Joe, MANCINI, Donato Paolo and KUCHLER, Hannah, 2020. BioNTech and Pfizer raise hopes with breakthrough Covid-19 vaccine. [online]. 9 November 2020. [Viewed 15 November 2020]. Available from: https://www.ft.com/content/497594f4-7771-4af5-98dc-8c98487ea212

Moderna: Covid vaccine shows nearly 95% protection, 2020. BBC News [online]. [Viewed 16 November 2020]. Available from: https://www.bbc.com/news/health-54902908

Oil market has not priced in prospect of a Biden victory | Financial Times, [no date]. [online]. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/0d6d0fbf-93b5-4f01-a6c8-f2d8ca95dc4a

RAVAL, Anjli, 2020a. IEA says coronavirus vaccine unlikely to boost oil market until late 2021. [online]. 12 November 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/eedf958c-c425-4a1b-bc90-6e213f7b8ba4

RAVAL, Anjli, 2020b. Opec slashes oil demand outlook on Covid restrictions. [online]. 11 November 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/ff79bf26-bc3f-4a83-be74-638b3123fc74

SHEPPARD, David, 2020a. Oil producers have more than a pandemic to worry about. [online]. 11 November 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/e1b7bab4-b962-4fab-ae7f-10da597b1cf6

SHEPPARD, David, 2020b. Oil sinks to lowest since May on fears new Covid rules will hit demand. [online]. 29 October 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/1b5f207b-d849-47ee-94be-3f8153c67719

SHEPPARD, David, 2020c. Oil traders tear up demand forecasts as Covid lockdowns return. [online]. 31 October 2020. [Viewed 17 November 2020]. Available from: https://www.ft.com/content/75ff69c2-e83f-4c18-9451-598b6f17edd8

WTI USD | Cours du pétrole brut WTI Dollar américain | Cours Cours du pétrole brut WTI Dollar américain, [no date]. Investing.com France [online]. [Viewed 17 November 2020]. Available from: https://fr.investing.com/currencies/wti-usd

Organization of the Petroleum Exporting Countries, 2020. OPEC Monthly Oil Market Report [online]. Vienna: OPEC, 11 november 2020. Available from: https://www.opec.org/opec_web/en/publications/338.htm

Price movement recap

The violent sell off we have just been through this week and at the end of September is very correlated with the negative ‘narrative’:

• China has loosely mentioned a net carbon neutral target by 2060.
• Joe Biden’s likely victory leading to the ‘imminent return of Iran’ and a 2^nd push for renewable energies contributed to push the oil price down.

Looking at 2021, China is planning to double its net import coverage through SPR (strategic petroleum reserves).  This positive news is not sufficiently important to push the oil price up but it provides support to maintain price levels. moment.

Futures prices / Cost Curves:

The Gulf Oil market is in contango as shown in the 1^st graph below. Due to the Covid-19, supply remains higher than demand which increases the premium (storage+financing).

On the 2^nd graph dated 3 weeks ago, the contango situation was similar.

Supply and demand dynamic

As you can see on the graph, OPEC’s crude oil production has decreased significantly as a result of the pandemic. However, there has been a small increase thanks to the return of the largest Libyan field.

Demand declined in the second quarter of 2020 due to Covid-19. Because of confinement, the petrol consumption decreased (cars and planes). At the same period last year, the demand was higher by 0.7 mb/d.

In our opinion, the decrease in demand will continue due to the 2^nd virus wave and the new measures to counter the virus spread.

On the positive side, we see that Asian oil demand is coming back, which is expected to be a major catalyst in Q4. Physical markets are strengthening there because Covid-19 is better controlled and an economical takeover is expected.

As shown above, the oil market is in contango. From an investment perspective, we recommend being long for the next 3 to 6 months. We think that due to the pandemic, the demand will remain low, especially during the 2^nd wave in which we are currently in. The oversupply increases the storage costs and raise the today’s contractually agreed prices for future deliveries. The unbalance between supply and demand, currently in favor of supply, creates a situation in which investors should be long.

Abbas Al-Azawi

Alexis Baeriswyl

Valery Sikorskiy

References

BOURSE, Zone, [no date]. PÉTROLE BRENT (LONDON BRENT OIL) : Graphique de Cours Comparatif | XBNT | XX00000BRENT | Zone bourse. [online]. [Viewed 28 October 2020]. Available from: https://www.zonebourse.com/cours/matiere-premiere/LONDON-BRENT-OIL-4948/graphiques-comparatif/

Dubai Crude Oil (Platts) Financial Futures Quotes – CME Group, [no date]. [online]. [Viewed 27 October 2020]. Available from: https://www.cmegroup.com/content/cmegroup/en/trading/energy/crude-oil/dubai-crude-oil-calendar-swap-futures.html

Le pétrole récupère au lendemain d’une forte chute, 2020. Allnews [online]. [Viewed 27 October 2020]. Available from: https://www.allnews.ch/content/march%C3%A9s/le-p%C3%A9trole-r%C3%A9cup%C3%A8re-au-lendemain-d%E2%80%99une-forte-chute

London open: Hopes for oil reprieve on reports of China SPR buy-up, [no date]. FXStreet [online]. [Viewed 27 October 2020]. Available from: https://www.fxstreet.com/analysis/london-open-hopes-for-oil-reprieve-on-reports-of-china-spr-buy-up-202004020828

SHEPPARD, David, 2020. Oil traders braced for balancing act in wake of US election. [online]. 27 October 2020. [Viewed 28 October 2020]. Available from: https://www.ft.com/content/00f63355-c1fa-4cf8-ad18-450c12440106

This Week in Petroleum, [no date]. [online]. [Viewed 29 October 2020]. Available from: https://www.eia.gov/petroleum/weekly/

Westbeck Capital Management LPP, 2020. Monthly Newsletter [medium]. London: Westbeck Capital, september 2020.

Organization of the Petroleum Exporting Countries, 2020. OPEC Monthly Oil Market Report [online]. Vienna: OPEC, 13 october 2020. Available from: https://www.opec.org/opec_web/en/publications/338.htm

Price Mouvement Recap

Due to the pressure from Donald Trump to reduce the price of crude, Brent as wellas West African Qua Iboe and Nemba prices were dropping down till the end ofNovember to less than $60 a barrel.

However, in the beginning of December, oil prices increased more than 2%. Saudi Arabia, Russia andother producers in OPEC decided to counterattack by cutting output in order to “drain” global fuel inventories and support the market. Consequently, Brent crude rose 2,9% to $61,70 a barrel.

Markets reacted well (hence the slight increase in prices early December) following the annoucement of OPEC. However, markets are still over supplied and therefore prices return to normal levels

Supply & Demand

Once again, high freight rates and weak Asian refining margins “kept buyers at bay” in West African market, which created a situation of unsold cargoes. Globaldemand growth of crude oil has weakened, especially from China, where refinershave a surplus of oil in storage.

“The Angolan market, which tends to be dominated by Chinese refiners, has beenslow to move. Traders said the Angolan market still has around 17 cargoes ofunsold January cargoes available, out of a total of 43 in the final loadingprogramme.” (reuters)

“The Nigerian market has suffered the most from freight rates and it’s heavily over supplied, to the tune of around 30 cargoes for December and early January,which traders said was “worrying” at this point in the supply cycle, with just a little over two weeks to go until the February loading programmes emerge.” (reuters)

Forward Curves

There is no significant change concerning the forward curves. It is still in a contangosituation and still better to store crude. Nothing has changed since the last bulletin.For September and October 2019 we can notice a slight decrease of the futureprice surely due to the output cut from the OPEC countries.

OPEC and selected non-OPEC countries agreed last week to cut their output by1.2 million barrels per day during the first six months of 2019. This 1,2millions bpdcut is based on the production of October 2018.

Most of the cuts will come from Saudi Arabia, with smaller contributions likely tocome from Russia, the United Arab Emirates, Kuwait and Oman.

Other OPEC and non-OPEC countries are unlikely to reduce their output voluntarily by any significant amount so their participation in the agreement is mostly symbolic.

Sources

https://oilprice.com/oil-price-charts

https://www.reuters.com/article/us-global-oil/oil-prices-climb-on-opec-led-cuts-but-off-session-highsidUSKBN1O603M

https://af.reuters.com/article/angolaNews/idAFL8N1Y95GV

https://twitter.com/realdonaldtrump/status/1070328136150200320  

https://af.reuters.com/article/angolaNews/idAFL8N1YC3T0

https://af.reuters.com/article/angolaNews/idAFL8N1YA4O5

https://af.reuters.com/article/angolaNews/idAFL8N1Y84BXE

Price movement recap

 

Since October, BRENT and WAF crude oil prices continue to decrease significantly and we can see on the graph above that they are still correlated.

The reason behind this great decrease is an oversupply of crude oil in the market, in general. There are several causes for this decrease:

• The market reaction in regards to the US sanctions taken by M. Trump against Iran.
• Then, the US issued sanction waivers for eight countries importing Iranian crude

In order to react to this situation, OPEC countries decided to cut/reduce oil supply for next year. As a result, oil prices will rise and stabilize over time.

If we compare the previous Forward curve to the new one from this week, we can notice that the price decreased from around 8$/per barrel but we can see that future prices are in containgo resulting from the OPEC annoucement.

So it is better to store the crude since carrying costs are supported by a higher price. However afterwards, the future price decreases a little bit (from July 19) so it is better to sell (small backwardation).

Supply and demand

Freight rates for tankers have increased sharply since the beginning of October for Nigeria and Angola. Therefore the offer for WAF crude stays quite pricey for buyers and the high freight rates weigh somehow on Asian demand. The general buying interest, especially to Asia, had slowed due to rising freight rates, even though some spot cargoes were traded at the end of October. The daily cost of shipping Angolan crude to China has jumped to above $50,000, from closer to $42,000 on about a few days. Finally refiners have appropriated vessels in the Middle East to secure alternatives to their usual deliveries of Iranian crude which fall under US sanctions from 4^th of November.

“Freight is ridiculously expensive. It’s become a $1 a barrel more expensive going east, which puts the breaks on things,” one trader said.” (Reuters)

Total exports from main WAF crude oil producers will reach 3.86 million barrels per day (bpd) in December, according to 3.88 million bpd in November, led by declines in Angolan output. Nevertheless China’s crude oil imports increased to an all-time high of  9.61 million bpd in October. (32 percent increase on the same month last year)

 

Sources:

https://www.reuters.com/article/westafrica-oil/w-africa-crude-high-freight-rates-weigh-on-asian-demand-idUSL8N1XA82U

https://www.reuters.com/article/westafrica-oil/w-africa-crude-offers-for-nigerian-crude-stay-too-pricey-for-buyers-idUSL8N1XB7VL

https://www.erce.energy/graph/brent-futures-curve

https://www.reuters.com/article/westafrica-oil/w-africa-crude-surplus-cargoes-drag-on-spot-trade-and-diffs-idUSL8N1XI7BF

https://www.reuters.com/article/westafrica-oil/w-africa-crude-sellers-face-off-against-high-freight-and-excess-oil-idUSL8N1XJ6IP

https://www.theweek.co.uk/oil-price/95286/what-is-the-price-of-oil-and-which-way-will-it-go

https://www.theguardian.com/business/2018/nov/12/oil-prices-saudi-arabia-production-opec-khalid-al-falih